Tax Type
Corporation Income Tax
Description
Consolidated return
Topic
Allocation and Apportionment
Date Issued
07-29-1994
July 29, 1994
Re: Application under §58.1-1821: Corporation Income Tax
Dear********
This will reply to a letter dated May 23, 1991, received from**********requesting a ruling on certain tax issues for**************(the "Taxpayer"). I apologize for the delay in responding.
FACTS
The taxpayer's affiliated group is comprised of banks, financial companies, and nonfinancial companies. One of its affiliates is a bank in another state which conducts an automobile leasing operation in Virginia and other states. The bank has no property (other than the leased automobiles) or payroll in Virginia. Pursuant to an audit by the Department, the bank was included in the taxpayer's Virginia consolidated income tax return. The taxpayer requests a ruling regarding the Virginia tax treatment of the bank.
Additionally, the taxpayer asserts that apportionment of the ACRS addition creates an inequitable result in that more ACRS addition is apportioned than is attributable to Virginia property. Pursuant to an audit by the Department, the amount of ACRS addition determined under Virginia law has been added in the appropriate income tax return. Accordingly, pursuant to the provisions of §58.1-421 of the Code of Virginia, the taxpayer requests an alternative method of allocation and apportionment.
RULING
Virginia Tax Treatment of the Bank: The taxpayer asks if the bank is exempt from Virginia income tax. Va. Code §58.1-401 exempts from the Virginia income tax only banks subject to the Virginia bank franchise tax. The bank is not a "bank" as that term is defined in Va. Code §58.1-1201 and is not subject to the Virginia bank franchise tax. Therefore, it is subject to the Virginia income tax if it has any income from Virginia sources. The leasing activity in Virginia clearly generates income from Virginia sources.
The taxpayer also asks, if the bank is subject to Virginia income tax, whether it is a financial corporation. A "financial corporation" is defined as "any corporation, not exempted from the imposition of tax under §58.1-401, which derives more than seventy percent of its gross income from the classes of income enumerated . . ." (Va. Code §58.1-418, emphasis added). Thus, the 70% test must be applied to the bank's gross income, not its income from leasing activity in Virginia. The bank is clearly a financial corporation under the statutory test and must be included in the consolidated Virginia return for the financial group.
Alternative Method: Although only a small portion of the bank's property is located in Virginia, the consolidated group has a large portion of its costs of performance in Virginia. The bank has a large ACRS addition for the 1987 taxable year. Because of the impact of the bank's ACRS addition on the consolidated Virginia tax liability, you request permission to file a separate return for the bank, or, in the alternative, you propose to allocate the income from leasing activity in Virginia, which would be computed with an ACRS addition only with respect to property located in Virginia.
Permission to change to or from consolidated filing is generally not granted by the department, because this change can affect the allocation and apportionment factors and possibly distort the reporting of the portion of business done in Virginia. You have shown no extraordinary circumstances justifying a change in filing status other than the impact on tax liability. If permission to change were granted for this reason it would effectively allow taxpayers to manipulate their filing status from year to year in order to reduce Virginia tax liability. Therefore, permission to file a separate return for the bank is denied.
The factors governing permission to use an alternative method of allocation and apportionment are well established. The Department will not grant permission to use an alternative method unless the taxpayer has demonstrated by clear and cogent evidence that either: (i) the statutory method produces an unconstitutional result using the facts and circumstances of the taxpayer's situation; or (ii) the statutory method is inequitable because it (a) results in double taxation of income (or a class of income), and (b) the inequity is attributable to Virginia tax law or policy, rather than to another state's law or policy.
Neither of these two requirements for granting permission to use an alternative method is applicable in the instant case. The Taxpayer has not demonstrated that the statutory method is unconstitutional as applied to its consolidated group. The group's federal taxable income includes the income of the bank reduced by the full federal ACRS deduction, and therefore it is not inequitable to require the group to make the ACRS addition with respect to the full federal deduction.
Based on the findings above, the assessments with respect to these audit issues are correct. The audit report has been revised to reflect certain agreed upon adjustments. Because of our extended consideration of your ruling request, l will exercise my authority under Va. Code §58.1-105 to waive the interest that has accrued since the assessment. A schedule showing the revised amounts is attached and should be paid within 30 days of the date of this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/5322C
Rulings of the Tax Commissioner